Ever since the Treasury Department and the IRS released a notice Oct. 24 that 401(k)s could provide deferred-income annuities in target-date funds, advisors and Web commenters have been trying to figure out what comes next.
Although the shift may benefit savers, it also allows for increased risks, warns Jon Ten Haagen of Ten Haagen Financial Group. “I don’t have a problem with it as long as people are given enough information on costs and the fine little details of it, and transparency is enforced by the Department of Labor,” he tells FA-IQ. His Huntington, N.Y., firm manages more than $50 million. “Plan sponsors don’t pay a lot of attention to what products they are putting in there.”
Clients at Abacus Planning Group are unlikely to hear good things about the new rules from boss Cheryl Holland. “The suitability for an annuity in a retirement plan is so rare — I can’t even think of an example from my client pool — that I see no positives from this decision,” she writes in an e-mail to FA-IQ. The Columbia, S.C., firm manages $850 million. Holland questions why someone would purchase a tax-deferred product with additional layers of fees inside a tax-deferred account. “It’s like purchasing air to breathe,” she writes.
Under the revised guidelines, prices for the annuities will vary based on plan participants’ age; and some of these annuities may be offered only to people over a specified age. The annuities will be available for use in coordination with other investments in the defined-contribution plans. Plan sponsors can make target-date funds with annuities default options or not, according to the guidelines.
The regulatory shift aims to provide more guaranteed-income options to retirees, who face increased longevity and thus increased risk of outliving their savings, according to an IRS statement.
Advisors quoted in an RIABiz article warn that even with the regulatory green light, plan sponsors might be nervous about selecting annuities. For one thing, they could have fiduciary exposure decades after plan participants purchase the products. For another, clients already have trouble understanding how certain complex annuities work.
InvestmentNews commenters debated the issue at length last week. “This will allow [participants] to minimize investment behavior risks as they age to make sure their ’must have’ bills and financial obligations are covered,” one reader wrote in support of the policy change.
But another took exception to it. “Neither the Treasury nor the IRS regulates broker dealers or investment advisors,” this commenter wrote. “Just because the IRS and Treasury support this idea from a tax and ‘treasury?’ [sic] perspective doesn’t mean that it would fly as being sound investment advice or suitable.”